Choosing the Perfect Business Model for Your Startup

Launching a successful startup is not easy. That’s probably why almost half fail within their first five years.

No matter the industry, you’ll have issues and questions along the way. Some will be easy to solve, others will require more preparation and strategy. However, if you’re willing to invest the time and energy, you will put your startup in the best position to succeed.

One of the first questions you’ll face when launching a venture is deciding on what business model makes the most sense for your startup. A well-thought-out business model is at the heart of any successful startup.

Regardless of your product or how innovative your business idea, you’ll need a proven monetization strategy to push the startup forward — that’s where the business model comes in.

There are many different business models to choose from, but the key is to find the one that aligns with your business strategy and management capabilities.

If you aren’t sure what type of business model will work best for your business, here are a few proven revenue-generating strategies to consider.

The Subscription Business Model

A subscription business model is when a customer pays an ongoing price to gain access to your service or goods. Netflix, Blue Apron, and Dollar Shave Club are all great examples of the subscription business model. Customers pay those companies on a recurring basis, and in return, receive their products or access to their service.

Customers love the subscription model because it is more convenient, efficient, and cost-effective than paying piecemeal anytime they need the good or service.

The subscription business model is becoming more intuitive every day. Technology is making it easier for companies to track consumer usage habits and buyer trends. Sites like Amazon are starting to offer subscription services that deliver frequently purchased items automatically based on your historical buying data.

Subscription services don’t just provide value for consumers. The business model also has its perks for startups, which typically struggle with financial stability.

Think about how valuable it is to have recurring revenue and repeat customers. The subscription model provides a sustainable way for startups to grow. The recurring payments also help you better predict inventory needs and gives you a clear forecast of cash flow.

The Freemium Business Model

The “freemium” business model is nothing new, although the term may seem unfamiliar to some. The core principle of this business model has been used for centuries to drive sales.

You’ve likely visited a grocery store before when someone was handing out free taste samples. While the small bite was free, you needed to purchase the entire product to get the full benefits and enjoyment.

The free sample is the underlying principle of the freemium business model. It’s most commonly used in the service industry, particularly online services.

Dropbox, Buffer, and WordPress all operate using this model. They open their product to anyone that is interested. These users get introduced to the product and access several of the main features in a limited capacity.

Dropbox, a cloud storage service, gives free-users a limited amount of space to store data with the option to upgrade for unlimited space. Buffer, a social media management tool, allows limited access to its social posting and analytics dashboard unless users upgrade to a pro version.

The advantage of this model is that businesses can quickly attract users and grow leads while letting potential customers test their product. This creates a more active sales funnel and can mitigate some of the learning curves associated with new software. Customers also like the freemium model because it provides a low-risk trial period before they have to make a purchase decision.

The Customization Business Model

With many markets becoming saturated with domestic and international competition, a lot of businesses are focusing their efforts on adding value to their goods or services through personalization.

In fact, an Open Mobile Media study found that 53% of mobile professionals said that creating a unique and personalized buyer experience is critical to their sales process.

While the customization business model may have its origins in the technology space, it’s a relevant model for any industry. Consumers like products and services that reflect their individuality. Moreover, they want a unique and meaningful buyer experience.

If your brand can develop a reputation for a unique and engaging customer experience, you’ll create brand equity that surpasses competitors who may offer a comparable product or service.

Startups striving for a customization business model must really focus on their brand voice, employee training, R&D, and customer relations management. While customers are inclined to pay more for a highly-customized product or service, they also have expectations which must be consistently met.

The Broker Business Model

Another popular business model, especially for online startups, is the broker business model which offers growth opportunity with limited risk — albeit at a slightly smaller margin than many of the other business models mentioned.

The broker business model is the idea that you can create a brand that connects buyers and sellers. There are many variations, but one of the easiest examples if Amazon. Amazon has created a free-flowing marketplace where buyers and sellers can facilitate business transactions. Amazon takes a small cut of the sale, and the rest goes to the seller and distributor (which could also be Amazon).

Instead of taking on expense or financial risk that comes with creating a product, why not bring buyers and sellers together? In this day and age, creating a marketplace can be more appealing and effective than bringing your own product to market.

One of the primary benefits of the broker model is that you eliminate the need for manufacturing, holding inventory, and having to attract interested consumers. While there are some risks to the broker model, such as difficulty with quality control and customer service, the vast majority of startups that launch using a broker model find it much easier to get up and running than a traditional business-to-consumer or business-to-business company.

If you’re thinking about starting your own business, picking a business model should not be taking lightly. This is the foundation for how your business will operate, and can greatly impact your subsequent strategies.

To help you better understand the most effective business model for your needs, contact Rivero, Gordimer & Company’s Valuation & Advisory team.

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